The Passion of Alan

There's a lot of speculation around Washington as to what exactly it was that caused Alan Greenspan's epiphany.  The whisper campaign has it that the rapture occurred over a cup of morning coffee when Alan's wife, who was leafing through the movie page, suddenly sprung on the 78 year old Alan, the tricky question of  retirement.  You can't, she said, go on forever; it's about time you started thinking about your legacy.  After all, up until the collapse of the dotcom bubble Alan was frequently equated in omniscence at least to the status of a pre-Galillean pope.  No doubt that's heady stuff even for someone who is perhaps the world's second most powerful man.

Alan --we call him that not out of personal familiarity-- is, of course, often in the habit of speaking in tongues when he is not in his more normal guise of the oracle of Constitution Avenue. Those around him have to bend forward and listen very carefully.  Thus, when Alan, the great mover of markets, decides to be loud and clear, you had better be warned that something really, really big is up.

Alan testified twice before various House and Senate banking committees this week and what he had to say each day has upset a great number of apple carts.  Over at the White House, Karl Rove thought he had a problem when Halliburton started running TV ads claiming it wasn't who they knew but who they are.

But first, a little contextually important Alan-history:  in his younger days the oracle of Constitution Avenue was a disciple of the famous libertarian writer Ayn Rand.  Rand is most famous for her novels depicting strong individuals (Gary Cooper played an architect in the movie made from one) who in lonely heroism battle the machinations of a bureaucratic and corrupt system.  In recent years, if he is to be judged by his actions, Alan had done a complete 180 degree flip-flop.  Most recently, in order to soften the pain of the dotcom bust, he has pursued the most vigorous  central bank manipulation of the economy in history.  In sum, laissez fare might have been something he found on the menu of a French restaurant for all he knew. 

Most of us, over the years, have come to accept the idea that our central bankers are there to smooth the economy from the cyclical bumps and dips that typify economic activity.  That's usually managed by raising and lowering interest rates at key points to discourage overly aggressive markets and to give a little heart therapy to moribund ones. 

In the world of Alan Greenspan we are no longer supposed to suffer the consequences of what the master once typified as "irrational exuberance".  So this time around the so-called recession after the great boom and bust of the 90's was so short lived --at least, officially-- that economists, who seem to travel in packs when it comes to announcing that a strong recovery is just around the corner, can't even agree when it began or when it ended, even according to the official government numbers.  (Of course, we know those numbers do indeed lie and that will be the subject of one or more of these future columns)   

And so on the eve of a massive meltdown, without any need for prompting and with Alan cheering it on, the administration decided to pump huge amounts of money into the economy by cutting taxes while boosting spending both domestically and, more tellingly, internationally, as the military was unleashed on Iraq to create an $80 billion a year wad of government contracts .  But why would average Joe taxpayer worry about that?  He was promised lower taxes as far as the eye can see.

In the meantime our Alan was doing his bit at the Fed.  He cut interest rates to the lowest they had been in half a century and encouraged the banks to lend, lend, lend.  The American megaconsumer, who never needs any encouragement, was also urged to get out and buy their way out of the downturn.  Not only did auto manufacturers offer no down payment, 0 percent financing but mortgage bankers were allowed to drop even minimum requirements on balloon home mortgage loans whose rates will skyrocket as interest rates start to go up, as they inevitably must. Instead of cutting back and saving a little money, as is their normal instinct in a downturn, consumers went out, refinanced their houses increasing their debt, bought newer bigger, more energy guzzling cars and houses, paid off their plastic debt and went right out and maxed out their cards again.

And so, indeed, there wasn't much of a recession and for a while it looked like all this activity would bear its fruits.  Companies, which did cut back mightily in hiring, started to make profits and the stock market, after 3 losing years, started to take off.  And so....one might say, so far so good.  The only trouble was (is), the normal things that happen as you get into the second or third year of a recovery just didn't seem to happen.  First, the job market, which requires 150,000 new jobs per month just to match the newcomers in the economy, continued to be downright anemic, at best losing better paying jobs and creating more Wal-Mart greeters and burger flippers

Equally ominous, there was no "pent-up demand".  That's an economist's buzz word that is used to describe what happens when people hunker down and put off replacing their old appliances for a year or two.  And so our friend Alan, in this parable, finds himself suddenly pushing on a string. Yes, he has lowered interest rates as far as they can go without the banks paying customers to take their money, and yes, he has pushed up home prices so people could bump up their mortgages and yes, he pulled the rug out from under the dollar, and yes, the government sent tax rebates back to everybody on a very unprogressive scale but still, here we are in an election year and things are starting to slide backwards.

Alan, it seems, may be riding the little train that couldn't.  So what does he do short of self flagellation; why he carries his brief all the way up onto that Golgotha called  Capitol Hill and lets go a little truth.  On Tuesday, he startled everyone who was listening --they do a lot of sleeping up there so it was probably a pretty tight number-- with a dire warning that the two government agencies, Fannie Mae and Freddie Mac, that back home mortgages may be in serious financial trouble.  Some of you, who aren't sleeping, may remember that not too long ago there was a little flap with one of these Agencies, Fannie Mae, when they were found to have cooked their books to the tune of $5billion last year.  They actually had hid some of their earnings.  Now why, you might ask, would a publicly traded but semi-governmental agency want to hide earnings of that magnitude.  You needn't wait for an answer, we'll give you our opinion:  Because they want to have some cushion against all those lousy loans they've got out there, houses with flimsy mortgages that won't be able to be paid when rates go up as the housing bubble too, comes to its dire end and kaplunk.....

So Alan was covering his reputed ass for posterity, a posteriori, it seems when he suddenly warned that these agencies that were merely following his lead turn out to hold the mortgages to millions of houses that can't be paid off by maxed out unemployed ex-consumers.

But Alan wasn't finished there.  The next day he went in front of another august Capitol Hill body and washed his hands of the deficit.  Yep, you heard it first here.  Alan does not take any responsibility for the growing deficits.  As he told the Senators, tax cuts are great, they stimulate the economy, the only trouble is that they drive up the deficit.  And, he went on to say, there's nothing to do but cut spending and cut it fast.... Because, the baby boomers are going to retire starting five years from now and they are going to want to collect their social security checks every month and get their promised medical care, something they have just been contributing to since they started working back in the Sixties.

Okay, says Alan, maybe they paid in but deep down inside they never thought they'd get it back.  They should have put more money aside for a rainy day like me.  It's the fault of modern medicine, people live too long.  They were supposed to contribute to the account but die before they could collect.

Yes, our friends, the second most powerful man in the world is telling you to save your money.  Of course, he hasn't told you how much and how fast he, or his successor, is going to depreciate the dollars you do save, when recession phase 2 sets in, has he?

  rmb     

 

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